Electronic trading has the potential to revolutionise the oil trading business over the next few years. New technological advances mean that traders need only a desk-top PC, a modem and an internet browser to gain access to electronic trading platforms. Almost all energy-related OTC trading has traditionally been conducted through brokers by fax or over the telephone, leaving much scope for efficiency savings. Internet-based systems allow traders access to a wide range of real-time price and supply information that should bring new, smaller participants into the market and hasten the process known as disintermediation - in other words, cutting out the middleman or broker. Resistance is likely to come from established futures traders, who fear that increased price transparency and more widely disseminated industry information will reduce profit-making opportunities. However, more market information and greatly reduced overheads are expected to more than offset the effect on margins, leading to improved trading performance for participants on an electronic exchange.
Any electronic trading platform, like its open-outcry equivalent, will only succeed if it attracts a large enough volume of trade to make it immune to manipulation by a single, or small group of, traders - ie., liquidity is the key to growth. The swaps market is extremely liquid but is currently fragmented and inefficient, and the use of brokers leaves price information opaque and restricted. Electronic exchanges will concentrate liquidity in this market, reducing costs and widening access. Nymex and the IPE could lose trade to the new OTC platforms such as the recently launched IntercontinentalExchange, thus far judged to be outside the regulatory jurisdiction of the US Commodities and Futures Trading Commission. However, new legislation currently before Congress could soon lighten the regulatory burden on established futures exchanges.
Procurement - that is, the buying of goods and services - has been one of the first segments of the energy industry to embrace the new e-technology. The potential for cost savings is immense in an industry that spends in the region of $200 billion each year on purchases of goods and services. E-commerce is changing the balance of power by allowing purchasers to co-operate and beat down prices through “reverse auctions” over the internet. Furthermore, industry-wide exchange portals are bringing together companies from across the industry into an electronic marketplace where they can combine to buy and sell goods and services relating to all parts of their operations. Many other exciting opportunities will change the way in which energy companies operate as high-speed telecommunications networks become more widely available, allowing offices in different parts of the world to analyse and react to real-time data and images.